In Canada, the use of reverse vesting orders (“RVO”) has continued to allow the purchaser of an insolvent company to purchase its shares and vest out certain unwanted and excluded contracts or liabilities to a new company or companies. RVOs can be an effective and efficient means to carry on the business of the restructured company uninterrupted when there are licenses or permits that cannot be transferred easily or without consent. The first RVO approved in Canada appears to have been in 2015. Since that time, dozens of RVOs have been approved. At least twice the court has approved them when they were contested. RVOs have withstood much judicial scrutiny despite the fact that they are not expressly contemplated by the CCAA, the BIA or any other insolvency legislation.
Despite their extensive adoption in Canadian insolvency law, the Ontario Superior Court in Harte Gold Corp (Re), 2022 ONSC 653, issued a warning that the use of the RVO should continue to be regarded as an unusual or extraordinary measure and cannot be used simply because it is more convenient for the purchaser. The Court set out that the debtor, the purchaser and the monitor should be prepared to answer the following questions when seeking approval of an RVO:
- Why is the RVO necessary in this case?
- Does the RVO structure produce an economic result at least as favourable as any other viable alternative?
- Is any stakeholder worse off under the RVO structure than they would have been under any other viable alternative?
- Does the consideration being paid for the debtor’s business reflect the importance and value of the licences and permits (or other intangible assets) being preserved under the RVO structure?
With these considerations in mind, the court in Harte Gold looked at the factors under section 36(3) of the CCAA and held that the RVO was appropriate in the circumstances.
Following the release of the Ontario Superior Court’s decision in Harte Gold (supra), the Quebec Superior Court released its judgment in Arrangement relatif à Blackrock Metals Inc., 2022 QCCS 2828 which followed the new test set out by the court in Harte Gold as well as the factors set out in section 36(3) of the CCAA. In granting the RVO, the Quebec Superior Court held that the RVO would only provide benefits and no stakeholder would be prejudiced.
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